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Shareholders said corporate reforms merit millions in fees. Now they must prove it

Saturday, June 11, 2022

By Alison Frankel

(Reuters) - When plaintiffs lawyers in a derivative suit against Pinterest (NYSE:PINS) Inc board members asked for approval of their $5.4 million fee request last April, they told the judge they deserved twice their lodestar bills because they’d obtained significant corporate governance reforms that would make the company more diverse and inclusive, enhancing its long-term value for shareholders.

In an order issued on Thursday, U.S. District Judge William Alsup of San Francisco told the firms to prove it.

Alsup granted final approval to the settlement, in which Pinterest has agreed to commit $50 million to several diversity initiatives that vest the board with ultimate responsibility for both improving Pinterest’s corporate culture and assuring that the online image sharing service offers users more diverse responses to their search queries. The judge awarded Cohen Milstein Sellers & Toll, Renne Public Law Group, Bottini & Bottini, and Weiss Law $2.5 million in fees – about $200,000 less than their lodestar billings and less than half of what they requested.

But that award may go up if plaintiffs' lawyers can show Alsup over the next two years that Pinterest is living up to the settlement agreement and that the reforms shareholders obtained in the derivative deal have resulted in an actual benefit to the company.

To that end, the approval order requires Cohen Milstein and the other firms to appoint lawyers “to enforce the settlement terms and police the corporation.” Alsup directed shareholders to file biannual reports documenting “how much progress has actually been made (or not made)” in attaining the goals laid out in the settlement agreement. If he likes what he sees over those two years, Alsup said, he will grant more fees to shareholder counsel.

I reached out to both plaintiffs' lawyer Julie Reiser of Cohen Milstein and Pinterest counsel Boris Feldman of Freshfields Bruckhaus Deringer but neither offered comment on the extremely unusual approval order – the first, as far as I know, in which a judge has partially conditioned fees in a derivative case on the success of corporate governance reforms.

(Feldman said the same thing at a May 26 final approval hearing https://tmsnrt.rs/3xNQVBL, telling Alsup that he was not aware of any other derivative case in which the fee award was "contingent on future events.”)

Alsup has been leery of the value of the Pinterest governance reforms since shareholder lawyers first asked for preliminary approval of the settlement – billed as the first derivative deal to require a corporate board to oversee audits of the company’s diversity and inclusion efforts -- last November. My Reuters colleague Jody Godoy covered the preliminary approval hearing Alsup oversaw last January, in which the judge said shareholder lawyers too often tout “cosmetic improvements” and then ride “into the sunset” without assuring that they’ve achieved any real change.

Alsup was particularly concerned in this case because Pinterest’s board had already adopted several policies intended to improve corporate culture before shareholders settled the derivative suit. The board brought in Wilmer Cutler Pickering Hale and Dorr to conduct an internal investigation in 2020, after high-ranking women at the company stepped forward with allegations of pervasive race and gender discrimination. Following a six-month probe, the company said it would (among other things) revamp training, set new diversity goals and partner with the NAACP to create an inclusion advisory council.

Shareholder lawyers persuaded the judge to grant preliminary approval in February, arguing that their proposed settlement added considerably to the board’s own initiatives by, for instance, requiring the company to invest $50 million in diversity programs and imposing oversight responsibility on the board itself. Plaintiffs lawyers sounded similar themes in April, when they moved for a $5.4 million fee award. That amount, they said, was only 10.75% of the $50 million Pinterest had pledged to spend on corporate governance.

At the final approval hearing last month, the judge made it clear that he would base fees on lodestar billings, not the $50 million budgeted for reforms.

“There's no money changing hands here,” he told Reiser of Cohen Milstein. “That's what concerns me. And they say they will allocate, in the future $50 million, over 10 years. We have no way of knowing whether that's going to happen.”

Pinterest lawyer Feldman told Alsup that the company considered the shareholders’ fee request reasonable. Feldman also pushed back when the judge floated the idea of a 10-year monitoring program that would allow him to keep tabs on the company's compliance.

That would be “inappropriate,” Feldman said. “You shouldn't retain 10 years of jurisdiction over a consensual settlement between private parties with no -- no one died here. No towns were burnt down,” he continued. “The court, respectfully, should not be our corporate overseer for the next 10 years.”

Alsup said at the conclusion of the May 26 hearing that he still had doubts about approving the settlement without a mechanism for him to evaluate the benefits of the governance reforms. “The easy thing to do would be to rubber-stamp this,” he said. “ (But) I've seen too many derivative cases, and I know the abuse.” He advised the two sides to add a monitoring component to the settlement.

In a post-hearing brief, plaintiffs lawyers said they’d reached a deal with Pinterest to allow them to police the settlement for two years, with regular reports to the judge on the company’s progress.

Alsup groused in the final approval order that the settlement gave Pinterest 10 years to invest $50 million in diversity programs, so the two-year monitoring feature would leave the company “unpoliced” for eight years. He nonetheless approved the settlement.

Alsup is, by his own admission at the May 26 approval hearing, more of a stickler on shareholder settlements than most judges. It will be interesting to see if any other courts follow his lead on requiring proof that corporate reforms have accomplished something before rewarding plaintiffs lawyers for obtaining them.

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